Morningstar | Maintaining No-Moat Lonza's FVE of 215 CHF
Lonza's pharma and biotech segment, which is primarily a contract drug manufacturing business, will be the company's key growth and profitability driver as pharmaceutical firms continue to invest in biologics, biosimilars, and other specialized drugs that are difficult to produce. The company maintains an extensive network of partnerships with pharmaceutical and biotechnology firms that leverage its expertise and scale to optimize drug production and avoid the risks of in-house manufacturing. While this business can be volatile (drug-development programs can be suddenly discontinued), customer relationships can be long-lasting, as drug developers tend to stick with trusted and consistent suppliers during a drug’s life cycle. Lonza's $5.5 billion acquisition of Capsugel in 2017, a drug capsule manufacturer, added vertical integration to the segment.The specialty ingredients segment is principally driven by the 2011 acquisition of Arch Chemicals, which has made Lonza the global leader in microbicide production and also expanded its reach into personal care, health and hygiene, industrial preservation, and materials protection. This business provides a more stable but slower growth profile to balance the risk inherent in the pharma and biotech segment. Furthermore, the technological and regulatory expertise developed in the more demanding pharma and biotech industry should allow the company to leverage its know-how in these adjacent industries. Lonza sold its struggling water care business in late 2018. While the company historically struggled with uneven demand in its pharma and biotech segment, its midterm focus is to optimize its global footprint to best serve its customers, drive operational efficiencies and improve its margins, and pay down its debt. Overall, we think the firm will continue to benefit from long-term contracts, increasing manufacturing complexity, and customer switching costs; however, the bargaining power of its large customers will make building a moat a challenge.Lonza supplies services and products that range from active pharmaceutical ingredients and stem-cell therapies to drinking water sanitizers, from vitamin B compounds and organic personal care ingredients to agricultural products, and from industrial preservatives to microbial control solutions. Co. operates in two segments: Lonza Pharma & Biotech, which clusters all of Co.'s offerings for pharmaceutical markets, focuses on providing custom development, custom manufacturing, cell therapy, viral therapeutics and bioscience solutions; and Lonza Specialty Ingredients, which includes offerings in its consumer care, agro ingredients, industrial solutions, wood protection and water treatment.
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